The Time-Varying Response of Hours Worked to a Productivity Shock

This paper revisits the dynamic response of hours worked to a total factor productivity (TFP) shock. I estimate a structural vector autoregression that includes time-varying parameters and stochastic volatility. The estimation produces structural parameters that are consistent with the long-run identification. The impulse response functions of hours worked to a TFP shock are negative on impact and at the business cycle horizons. This is evidence that Gali (1999) would interpret as supporting new Keynesian theory. My results also show that TFP shocks are the dominant source of variation in average labor productivity. Structural changes in the U.S. economy play an important role in the TFP-hours worked relationship.